Blow Off Top…Could It Happen?

Every time we pick up some article on the stock market of late, all we read is the stock market is on the verge of a devastating wipeout, or that the next collapse is just around the corner. One of the best headlines we saw recently was from a famed market guru with a headline of “2017 Is Going to Be Worse than the Great Depression!” It is enough to make you run home, pour a long hot bath, slit your wrists, and climb in to the tub.

Okay, maybe that is extreme. Naturally, there are many reasons writers give to back up their case. Those range from the election of Donald Trump, Brexit, rising interest rates in the US, and of course the best one—that the bull market is now into its ninth year from the major low of March 2009 without a correction exceeding 20% and is in the mother of all bubbles. All of that is true. But none of that makes for a final top just because the stock market has been rising for eight years plus.

One market often compared to today is the “Roaring Twenties” market that got underway in August 1921 and topped in September 1929. That bull market lasted 97 months. Today’s market has already surpassed 97 months in April 2017. We are now in the 99th month. The “Roaring Twenties” market wasn’t even the longest. The 1990s’ market got underway in October 1990 and lasted until January 2000 or 112 months. Who knows? Maybe we have another year to go on this one too. For the record, the one significant correction in the 1990s only lasted a month and a half, but it did shave 19.3% off the Dow Jones Industrials (DJI).

It is not unusual for bull markets to end in a blow-off. These are the points in time when the market just keeps going up and nothing makes any sense. It may be a correct assessment but the shorts can go bankrupt during these periods. Blow-offs always occurs at the end of the cycle and usually come after a long period of time when the market has been moving inexorably higher. 

There are numerous examples in the past. The best ones are: the “Roaring Twenties” 1921–1929 that really got underway in late 1926, culminating in the blow-off top into September 1929; the gold market of the 1970s (1971–1980) that ended in a blow-off that started in April 1979 and ended in January 1980; the Tokyo Nikkei Dow of the 1980s (1982–1990) that ended in a blow-off into January 1990; the 1990s High Tech/Internet market (1990–2000) and subsequent blow-off known as the Dot-com bubble that started in October 1999 and ended for the Dow Jones Industrials (DJI) in January 2000, and, for the Nasdaq and the S&P 500 in March 2000.

Source: www.macrotrends.net

The bull market of the “Roaring Twenties” was one of the greatest bull markets in stock market history. From August 1921 to the top in September 1929, the DJI gained 497%. There was only one correction of significance during that period. In 1923, the DJI corrected back 18.6% and then chopped around into May 1924. After that, things really heated up. But it was the final liftoff that was most impressive. From June 1928 to the top in September 1929, the DJI gained 80%. Like all blow-offs and all massive bull markets it ended in tears. Over the next three years until July 1932 the DJI collapsed 89% and the US and the world was gripped in the “Great Depression.” It wasn’t until 1954 that the DJI finally passed the September 1929 high.

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Disclaimer: David Chapman is not a registered financial advisor, nor an exempt market dealer (EMD). We do not and cannot give individualized market advice. The information in ...

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